Friday, January 16, 2009

Playing the Brent-WTI crude oil differential

Brent crude oil has historically traded at a slight discount to West Texas Intermediate, but that trend has reversed itself in recent weeks. This appears to be the result of higher-than-average inventory levels in the U.S., particularly at Cushing, Oklahoma – the delivery point for NYMEX contracts....

...Noting that while Brent oil pricing has been relatively flat over the past two weeks and WTI continues to decline, Mr. Khouri told clients that he does not expect this differential to narrow materially as long as U.S. inventories remain on the rise.

He suggested that investors looking to capitalize on this spread should consider low cost oil producers that have operations in the eastern hemisphere with crude prices linked to Brent.

Addax Petroleum Corp. is a “vehicle of choice” as its realized oil prices in West Africa are based on a differential to Brent crude and its current netbacks (costs associated with bringing oil to the market) are estimated to be approximately US$22.50 per barrel (after tax and royalty).

For those who want to isolate the WTI/Brent differential from general commodity volatility, Mr. Khouri highlighted Berry Petroleum Co. as a pair trade idea with Addax.